Question

The current stock price of Sanders is at $35. A put on Sanders stock with a strike price of $35 is priced at $10 per share while a call with a strike price of $35 is priced at $12. If you implement a covered call strategy today and the stock price decrease to $29, what is your total profit or loss (assuming you implement the strategy using 100 shares)?

Answer 1

Covered call is a strategy where an investor holds a long position in a stock as well as sells a call.

The current stock price is $35.

I would sell a call with a strike price of $ 35 and earn the amount of premium which is $ 12.

So, the total gain made is $12

Now, the stock price has declined to $29, the call option will expire worth less and I would gain the premium but at the same time ,I would lose the value of the stock.

I would lose $6

So, the net loss is : ($12 - $6) * 100 shares

= $600